“Prevailing in Washington as on Wall Street were the most vile and self destructive assumptions of anti-capitalists everywhere who imagined they could wield capital even while abandoning the principles that created it; that systems could substitute for the moral standards they once embodied; or that men who lost trillions of dollars of other people’s money might somehow recover it if only the government would give them trillions more. Crony capitalists on the right and socialists on the left united as always behind their most fundamental belief, that wealth is to be captured by power and pull rather than created in the minds of men.”

from Panic – The Betrayal of Capitalism by Wall Street and Washington by Andrew Redleaf and Richard Vigilante

To blame the mere shortage of cash for the evils caused by incompetence and corruption is the favorite lie of socialists and crony capitalists everywhere. Socialists always say there is no problem of inequality or poverty that can’t be solved with cash.  It is cash alone that separates the rich from the poor- not talent or skill or hard work or thrift. Similarly, in the socialist view it is only access to capital that separates “greedy” and “monopolistic” (read “successful”) firms from the thousand flowers that would bloom if only the government would create a “level playing field” and “enforce competition.”

After the socialists becpme the government and begin evolving into crony capitalists, their favored beneficiaries- Soviet state-owned factories, Japanese banks, Fannie and Freddie in the United States- are always described as faultlessly devoted, idealistic, and hardworking, or at least essential.  If they underperform (and they always underperform), it is only because they are short of cash- which the government then always provides in some form or another.

From Panic by Andrew Redleaf and Richard Vigilante

The political stereotype is that the Republicans are the party of big money and Democrats are the party of the little guys.  But the reality is something else.

Crony capitalists are those who use Washington to create a system that they can game, to use against their smaller competitors.  I have said before in this blog, ‘crony capitalism is to capitalism as National Socialism is to Socialism.’  Crony capitalism is not a free market. They have bastardized the word ‘capitalism’ the same way that the closed minded form of modern political ‘liberalism’ bastardized the meaning of open minded ‘classical liberalism’.

Mona Charen makes that point again in the National Review Online

Who’s More Irresponsible, Wall Street or State Governments?

Excerpts:

Anecdotes are not evidence, but consider this: According to the Center for Responsive Politics, Democrats received $11.3 million in contributions from hedge funds in 2008. Republicans got $5.9 million. Some critics of the Dodd bill note that it would give broad discretion to the FDIC and a new regulator to decide which firms would be bailed out and which would not. That isn’t so much preventing another crisis as institutionalizing “too big to fail.” The moral hazard problem — i.e. encouraging risky practices with the implicit or explicit promise of a bailout — remains.

Furthermore, the Dodd bill — and the Democrats’ narrative — completely omits the role of government in the financial debacle. Neither Fannie Mae nor Freddie Mac is mentioned in the legislation. But the incentives created by government, specifically the sustained push through law and regulation to provide mortgages to more and more uncreditworthy borrowers, created the conditions for the housing bubble and for its eventual crash.

I use a money management firm, Banyan Capital Management , owned and run by Gary Watkins.  Douglas Ott, II  is a portfolio manager for Banyan, and like Gary is a real student of the market.  I have been very satisfied with their results and their integrity.

In their quarterly letter and report, Gary and Doug referred to an element of great disappointment in the financial reform bill making its way through Congress, though there were many other areas of concern.

Currently, not everyone in the financial industries are held to the same standards.  Money managers (like Gary) are required to defer to the client’s interests above other considerations. Conflicts of interest and compensation structure must be clearly disclosed. They are also required to disclose their regulatory history.

Insurance agents, brokers and bankers are held to a different standard. As long as an investment is considered suitable they are not subject to the same rules of disclosure.

In his course of due diligence Gary, in the rare instances where he even deals with a security salesman, has uncovered players who plead guilty to financial crimes and have been sued.  This disclosure of their regulatory history is not currently required.

A simple rule change to require the same disclosure and integrity from all financial parties that are now required of money managers was included in the original bill, but lobbyists from the financial industry have successfully gutted it in favor of a new watchdog bureaucracy. Gary noted in his letter “History has shown such government offices actually accomplish little toward such a mandate  and mostly serve as cover for spineless politicians unwilling to do what is truly meaningful.”

I have written frequently that the biggest cause of the impact of lobbying that the president and so many others deplore so publicly is the growth in regulations that allow the crony capitalists to game the system with political influence that is commonly unavailable to their smaller competitors.

Behind so many regulatory initiatives are large companies gaining competitive advantage not by better serving their customers, but by using their political influence to write rules in their own favor. Many of the elected leaders are ignorant dupes of their influence, played like a cheap violin.  Others are quite aware of the game and sell their influence like a street whore.

Instead of trying to control yet another industry and trying to create power by transferring the allocation of wealth from the market to the government , Congress should create clear rules that require disclosure and honesty.  By seeking power and control rather than true regulatory reform, Congress seeks to institutionalize rather than eliminate the deceit that plagues our financial markets.

George Melloan writes in The Wall Street Journal,  The Lessons of Basel’s Bean Counters

Summarized:

In 1988 the banking regulators from  20 leading industrial nations of the International Monetary Fund met in Switzerland and created Basel I to create a common set of banking standards by setting risk based capital standards, and assigning degrees of risk.

But the Japanese banks were bragging about their compliance when they tanked in the 1990’s.

So they created Basel II.  Standards were toughened to include trading in securities and derivatives. All of this seemed irrelevant in stopping the meltdown of 2008.

Excerpt:

The international banking tumult of 2008 was not a result of insufficient rules or even primarily of noncompliance with the rules. Banking is perhaps the world’s most regulated major industry. As in Japan in 1990, the imperatives of politics simply overrode what the rule makers and rule enforcers were trying to accomplish, turning their labors to dust.

The 2008 crisis resulted when the Fed-created credit bubble collapsed and soaring housing prices deflated as well. To promote “affordable” housing, Bill Clinton had excused the two giant government-sponsored housing finance agencies, Fannie Mae and Freddie Mac, from normal banking rules, allowing them leverage ratios far in excess of the limits on ordinary lenders. Banks were forced to write risky mortgage loans, a large number of which were then folded into mortgage-backed securities that Fannie, Freddie and others sold internationally with triple-A ratings.

This business seized up, crippling banks throughout the world, when holders began to realize that the assets that backed the securities, home mortgages, were going under water at an alarming rate. One of the great ironies of our times is that the two strongest defenders of the Fannie-Freddie shell game, Chris Dodd and Barney Frank, are now in charge of reforming banking regulation.

The better solution is clear rules, commonly understood financial prudence, and control of debt.  Yet our current government administration, which practices none of this, proposes to fix our financial system. I have yet to hear a peep out of Congress taking any responsibility for our financial mess.  This will only increase the likelihood or repeating or worsening the next crash.